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Jonathan Lennon and John Carl Townsend look at the option of pursuing civil recovery through the POCA regime.
High Court Civil Recovery
Part 5 of the Proceeds of Crime Act 2002 (POCA) is the civil part of that Act – it is in Part 5 that you will find cash Forfeiture Orders, and now Unexplained Wealth Orders and Account Freezing Orders – Part 5 is growing! But right from the beginning, the Act included Civil Recovery Orders (CROs).
CROs vest property in a trustee – in practice that is invariably someone working for the National Crime Agency; the lead agency for taking out POCA civil recovery claims. The NCA bring a civil recovery claim in the High Court and the target is property – that property must have been obtained through unlawful conduct as defined in the Act. The litigation usually starts with the NCA securing, without notice, a Property Freezing Order (PFO) freezing the assets that may become the subject of a final order. The end result is often what is in effect, a criminal trial in the High Court, with the defendants facing allegations that they probably were involved in drug trafficking, corruption, mortgage fraud and so on.
This article is aimed at the lawyers who defend in such cases. How are such cases funded? The answer is easy – privately. At first civil legal aid was available for these cases but the LAA simply did not properly engage and the rates were so poor and the mechanics so cumbersome that eventually a scheme was introduced to permit access to the funds frozen by the PFO to those defending in such cases. However, the whole area of funding has become something of a specialism in itself.
The authors of this article are co-defending in a multi-handed civil recovery claim in the High Court where the unusual, if not unique, step of introducing costs budgeting was implemented. We cannot do justice to every aspect of defence costs management in civil recovery claims in this short article – but we do hope to give an insight into the options that are available.
The Curious Procedure in Asset Recovery Proceedings
Before turning to the issue of costs, we have to consider how a civil recovery claims begins.
A civil recovery claim, by its very nature, is likely to involve disputed allegations of fact. The disputed facts are rarely trivial matters of form and are much more likely to be the central concern of the case – e.g. whether the defendant is, in fact, a fraudster. You would expect such a claim to start life under Part 7 of the CPR; the usual starting point. You would be wrong. The Practice Direction on Civil Recovery requires (para 4.1) that a civil recovery claim must be commenced under the Part 8 procedure. Part 8 is the alternative procedure that is usually reserved for cases where there are no substantial matters of disputed fact and there is limited scope for disclosure.
Where there is a substantial dispute of fact that court can of its own motion, and as part of its function to manage claims, order the claim to proceed under the general Part 7 procedure, allocate a track and give appropriate directions; see CPR 8.1(3). There is also considerable authority for the proposition that cases with significant factual disputes are more appropriately dealt with using the Part 7 procedure; see Hamblin J. (as he was then) in Serious Organised Crime Agency v Pelekanos,  EWHC 2307 (QB) at :
“Funding difficulties meant that…the matter had some on for hearing under Part 8. The consequence has been that there has been no disclosure by SOCA, but merely the exhibiting of documents upon which they rely to their witness statements. In a case involving disputed allegations of fraud and other criminal conduct this is unsatisfactory”
Defence solicitors need to be alive to this issue from the very outset, see Simon J’s comments at  and  of SOCA v Coghlan  EWHC 429 (QB).
“Mr. Coghlan asserted that there was, …a considerable amount of evidence I will wish to introduce to these proceedings if [SOCA] continue with their case in the way they presently are. In particular, there is a good deal of material concerning their allegations under the heading ‘Unlawful Conduct’. In the light of these contentions it is surprising that there was no objection in the Acknowledgement of Service to the matter proceeding under the Part 8 procedure, at a time when he was represented by solicitors”
Regardless of this guidance, it is the authors experience that the NCA is usually loath to consent to any application for transfer to Part 7. Unhelpfully, there is a school of thought that the allocation of a case to Part 7 or Part 8 in civil recovery proceedings is of no consequence, as the Part 8 procedure can be amended to provide an adequate disclosure regime. The NCA are not the CPS; they are interested in obtaining proper litigation advantages over their opponents and there are obvious benefits to the NCA in keeping a claim within Part 8. For example:
there is no question of an onerous disclosure exercise and the starting position will not be disclosure by list; and
from a tactical perspective it will often assist the NCA in reducing the extent of the evidence relied upon at trial.
The advantages that the NCA derive from the Part 8 procedure are not usually advantageous to the defendants.
The reality is that, despite the case-law, asset forfeiture proceedings might very well remain in the Part 8 procedure throughout and, in those circumstances, costs budgeting will not take place. This is largely due to the impact of the Senior Master Practice Note dated 15 April 2016: POCA Civil Recovery Claims Under CPR Part 8, which on one interpretation suggests that bespoke amendments to Part 8 are appropriate to ensure that there is no delay in progress to trial even where the Part 7 procedure would usually be applicable. The Note seems to have been the Court’s reaction to the criticism in Pelekanos and it is the experience of the authors that despite the blindingly obvious fact that Part 8 is not the proper starting point for most civil recovery claims, that is where the Practice Note insists that we start and then take it from there with, perhaps, tweaks and amendments to Part 8 to allow for fairness. One way to argue for Part 8 is, of course, to argue for costs budgeting – as will be seen below costs budgeting is only available in Part 7 – it is also something favoured by many Masters and Judges who have to deal with directions on these cases and will be very used to costs budgeting from their experience of more conventional civil and commercial cases.
Variation to the PFO for Legal Expenses
Cost budgeting is of course all about the quantum of costs incurred, or to be incurred. But before we even get there, as a defender you need to ensure that you are properly funded for the work that you will do – assuming that is that the legal expenses are planned to be met from the assets frozen by the PFO.
Be aware that the NCA will happily let solicitors carry out extensive work on the mistaken assumption that a variation for reasonable legal expenses is ‘in the bag’. Our experience is that if there is no sealed order varying the PFO to allow for a particular period of funding then the solicitor is working at very serious risk. All that follows in this article, whether costs budgeting applies or not, is subject to the necessity of securing a variation to the PFO.
The starting point is s245B(1) of POCA which provides that the Court; “may at any time vary or set aside a property freezing order.” Section 245C is then entitled ‘Exclusions’ and specifically provides that the power to vary a PFO includes a provision to meet “reasonable legal expenses” (s245C(3)). Section 245C(5) then provides as follows:
Where the court exercises the power to make an exclusion for the purpose of enabling a person to meet legal expenses that he has incurred, or may incur, in respect of proceedings under this Part, it must ensure that the exclusion—
(a) is limited to reasonable legal expenses that the person has reasonably incurred or that he reasonably incurs,
(b) specifies the total amount that may be released for legal expenses in pursuance of the exclusion, and
(c) is made subject to the required conditions (see section 286A) in addition to any conditions imposed under subsection (4).
Section 286A (with s286B) is the provision allowing the Lord Chancellor to specify the “required conditions”; i.e. it was under this power that the Lord Chancellor issued the Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Regulations) 2005; hereafter ‘the 2005 Regulations’.
Option 1: The 2005 Regulations; the ‘required conditions’
The 2005 Regulations describes the mechanics of how often a bill may be submitted etc, it also sets out the hourly rates for solicitors and counsel; e.g. solicitor of at least 8 standing based in London on ‘standard’ (as opposed to higher) hourly rate would be charging £225ph plus VAT.
It is clear from a reading of how and when bills should be submitted that Parliament did not envisage that the costs budgeting regime would apply to these cases (this is not surprising as the costs budgeting regime was only introduced in April 2013). Part 3 of the Regulations provide that an interim payment for legal expenses may be released from the frozen funds once those expenses have been incurred and the amount which may be released by agreement or, failing agreement 65% of the amount claimed, with the remainder being dealt with by a Costs Judge. That procedure is the very opposite of the costs budgeting regime which imposes costs limits on the parties – the process is front-loaded.
Dispute on Quantum
Under ‘option 1’ this is entirely within the CPR scheme; see CPR PD on Civil Recovery para 7A.5:
The court will normally refer to a costs judge any question relating to the amount which an exclusion should allow for reasonable legal costs in respect of proceedings or a stage in proceedings.
So, when it comes to defence costs ‘option 1’ is the ‘Regulations option’ which basically means do the work and hope that the costs Judge agrees it was all work reasonably undertaken – because the NCA almost certainly will not.
Costs Judges, of course, will be more generous than the NCA, who have their own agenda, but that is not to say the process is not without risk. Option 2 – costs budgeting – takes out the risk.
Option 2: Costs Budgeting
The idea of costs budgeting is of course that each side has, in effect, monetary limits put on stages of work that it has to carry out. The process of budgeting, set out in the CPR, can be laborious and, frankly, tiresome. Up until now, it has not been a feature of civil recovery cases.
The authors represent two separate defendants in an-on-going civil recovery claim which appears to be the first case where the Court (a Master at a Directions Hearing) required the case to be budgeted. This was at the request of the defence after the claim was transferred, on our application, to the Part 7 procedure. The NCA had strongly contended that the matter should remain within Part 8 and that our application for transfer to Part 7 should be refused. The NCA had not anticipated our application that costs budgeting would be appropriate.
The costs management framework of CPR 3.12 (i.e. budgeting) is automatically applicable to all multi-track claims within the Part 7 procedure and provides a very good justification for asset forfeiture proceedings to be conducted pursuant to the Part 7 regime. The instinctive reaction that costs budgeting is a bad thing is not always right – there are advantages over and above forcing the case into the much more desirable (from a defence perspective) Part 7 procedure.
The costs budgeting regime provides an alternative to lengthy disputes surrounding the release of funds from the PFO. This is because CPR 3.12 offers a satisfactory and convenient solution that can give effect to the respective aims of the NCA and the defendants. The defendants seek certainty over the recoverability of their future costs – this is at the very core of CPR 3.12(2), which indicates that the purpose of costs management is that of managing steps “to be taken” and costs “to be incurred”; the court is to exercise its powers in this respect prospectively. The NCA, of course, seek to ensure that costs incurred by the defendants’ lawyers are not excessive. Again, that is expressly provided for by the operation of CPR 3.12 which is designed to ensure that costs are not disproportionate or unreasonable.
The Disadvantages of Costs Budgeting
Costs budgeting requires a degree of effort in the calculation of future costs and the creation of an agreed Cost Budgeting Report, as required by CPR 3.13(2). On the other hand, the work involved is no more onerous than that required in applying to a taxing Master for release of agreed funds from the PFO or, from the NCA’s perspective, resisting an application for release – though at least those representations are made directly to the Costs Judge under Option 1 without the NCA being able to comment upon them.
Obviously, the NCA have a ‘red line’ somewhere – perhaps where it becomes obvious that it is not cost effective to take the case any further forward. Money is not, of course, the only criteria that the NCA apply in deciding when a case is no longer worth the fight. The NCA and other agencies that are able to take out civil recovery proceedings are public bodies acting in the public interest – theoretically at least without costs considerations. Yet there is an obvious pressure on the NCA where costs could spiral to an unknown amount – defence teams have a certain amount of pressure they can apply with a view to settlement discussions is that is desirable for the defence. That said, it might be that the outcome of the costs budgeting process gives the NCA an early and unpleasant surprise which could make them more receptive to discussions.
The real advantage of budgeting is that it is a front-loaded exercise that removes risk and provides certainty going forward. The reality is that the process does probably drive down what would finally be allowed under what we have called ‘option 1’. However, you cannot bill for billing and spending hours every few months arguing with the NCA over bills that then have to be prepared for a Costs Judge’s assessment is not only inefficient, but also hugely frustrating. Budgeting is frustrating – but it is frustrating only once.
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